The court determined that the non-participating insurer must reimburse the insurer who defended. Steadfast Ins. Co. v. Greenwich Ins. Co., 2019 Wisc. LEXIS 9 (Wis. Jan. 25, 2019).
Historic rains hit Milwaukee in June 2008, overwhelming the Milwaukee Metropolitan Sewage District's (MMSD) sewage system. Raw sewage backed up into 8,000 homes. Lawsuits were filed against MMSD and two companies who MMSD contracted with the operate and maintain the sewage system, Veolia Water Milwaukee and United Water Services Milwaukee.
MMSD's Operating Agreement with United Water required United Water to maintain comprehensive liability insurance, naming MMSD as an additional insured. United Water secured a policy with Greenwich Insurance Company, with the last policy period beginning July 24, 2007 and ending July 24, 2008. The policy named MMSD as an additional insured United Water maintained that it last provided services to MMSD on February 29, 2008.
Beginning on March 2, 2008, and continuing through the June 2008 heavy rains, MMSD contracted with Veolia to operate the sewage system. Veolia had liability insurance with Steadfast Insurance Company naming MMSD as an additional insured.
MMSD tendered the lawsuits to both Steadfast and Greenwich The lawsuits were settled without MMSD paying any damages. Steadfast reimbursed MMSD for $1.55 million in defense costs. Greenwich refused to contribute to the defense because its policy ended before the June 2008 rains. Greenwich relied on its "other insurance" clause to argue that its policy was excess to Steadfast's policy.
Steadfast sued Greenwich to recover the $1.55 million in defense costs it paid to MMSD. The circuit court granted summary judgment to Steadfast, awarding the entire amount Steadfast paid MMSD, as well as $25,000 in attorney fees that Steadfast incurred in bringing the lawsuit. The court of appeals affirmed.
The Wisconsin Supreme Court noted that the plain language of both the Greenwich and Steadfast policies obligated the insurers to indemnify and defend their named insureds and MMSD against claims of damage caused by the negligence of their named insureds. The "other insurance" clauses did not apply unless the two policies were concurrent. Two policies could not be concurrent unless the insured the same risk, and the same interest, for the benefit of the same person, during the same time period. Here, Greenwich would owe MMSD only if the negligence of United Water caused damages for which MMSD was held responsible. Likewise, Steadfast would ow MMSD only if the negligence of Veolia caused damages for which MMSD was held responsible. The "other insurance" provisions were not relevant because Greenwich's "other insurance" clause provided successive insurance to MMSD
Further, Greenwich's policy provided potential coverage for a claim made in the lawsuits based on sewage backups. Therefore, Greenwich breached its duty to defend, and was responsible for all damages that naturally flowed from the breach.
The court also held that Steadfast was not entitled to full reimbursement of defense costs, but the defense costs should be allocated between Steadfast and Greenwich. The court adopted the pro rata allocation method to apportion the defense costs based on the insurers' policy limits.
Finally, Steadfast was entitled to recover attorney fees from Greenwich under contractual subrogation. Because Greenwich breached its duty to defend, MMSD had the right to request fees for successfully establishing Greenwich's obligation to defend. Because MMSD's rights of recovery against Greenwich would include attorney fees incurred in successfully establishing coverage, Steadfast was entitled to recover $325,000 in fees from Greenwich as MMSD's subrogee.